Dealer's long warranty lures traffic

Megadealer Rick Case understands the drawing power of a long new-vehicle warranty.

The Fort Lauderdale, Fla., retailer prodded Hyundai Motor America executives to adopt the 10-year/100,000-mile powertrain warranty that helped goose the company's sales in 1999.

More recently, Case doubled that warranty to 20 years/200,000 miles at his six Hyundai dealerships and three Mitsubishi stores.

Although some dealers see such a long warranty as overkill, Case says it gives him a competitive edge. He thinks the coverage has an especially strong appeal in a prolonged economic downturn when consumers are keeping their vehicles longer.

Case promotes the warranties in all his advertising. "I think people like the feeling that they are going to keep a car longer," Case says. "Many of the people who traded during the cash-for-clunkers program had bought new vehicles and kept them 10 to 12 years."

Leroy Larson, general manager of Rick Case Hyundai in Fort Lauderdale, says the expanded coverage lifted his unit sales about 10 percent when it began late last year.

The warranty encourages people to come back to the Case stores. Customers within 50 miles of a Case store are asked to return there to honor the warranty. If a customer is outside that radius, Case still pays claims under the warranty.

"It definitely gives us a talking point to advertise that other dealers don't have," Larson says. "It puts us on the customer's shopping list."

Larson initially thought the long warranty might lower finance and insurance income. But the store managed to maintain sales of extended service contracts, he says.

Rick Case Hyundai sells CostGuard service plans offered through the Asset Protective Division of Protective Life Insurance Corp. The CostGuard plans provide "wraparound" coverage, which means the plans extend the 20-year/200,000-mile coverage to the rest of the vehicle.

The sale of wraparounds has prevented the longer powertrain warranty from putting a dent in F&I volume, Larson says. About one in three of the store's customers still purchase an extended service contract.

Case always has believed long warranties build customer loyalty. He says the coverage gives customers peace of mind.

A Hyundai insider confirms Case was instrumental in urging Hyundai executives to introduce the 10-year/ 100,000-mile powertrain warranty.

"I was on the national dealer council at the time," Case says. "It was back when sales crashed and bottomed out in 1998. I put together a proposal in 1997, and it was over a year from when I presented it they wound up doing it. It was an overwhelming success."

When Hyundai hesitated to adopt his proposal, Case proceeded anyway by banding together with seven other southern Florida Hyundai dealers who were part of his advertising co-op group. The promotion improved new-vehicle sales in southern Florida as Hyundai's national sales stagnated. "It definitely got Hyundai's attention," Case says. "They had to do something dramatic. If they didn't, I don't think they would have stayed in business."

Hyundai's light-vehicle sales in the United States almost doubled from 1998 to 1999, to 164,190 from 90,217. Sales shot up again to 244,391 in 2000, 346,235 in 2001 and 375,119 in 2002.

The huge gains prompted Case to introduce his own 10-year/100,000-mile powertrain warranty on new vehicles sold at his Honda, Acura, Mazda and Audi stores several years ago. He says the extra coverage helped him set the monthly unit sales records for a Honda dealership.

Rick Case Honda in Davie, Fla., opened March 1, 2002. In its first full year in 2003, the store was the world's largest Honda dealership. Case Honda set the monthly record for sales of the brand that August, totaling 1,222 new Hondas, Case says.

Hyundai executives balked at the prospective cost of expanded warranty coverage in 1997. Case says the make's quality was good enough in the late 1990s to safely allow the company to back its vehicles with a longer warranty.

But the cost of Case's doubled warranty remains a question. Case would not disclose his upfront cost or divulge claims figures for the 10-year/100,000-mile coverage he extended on Honda, Acura, Mazda and Audi.

His warranty programs are insured through Protective Life Insurance's Asset Protection Division in St. Louis. The limited warranty includes a $200 deductible per occurrence.

Some insurers point out that after 20 years or 200,000 miles, the incidence of transmission and engine repairs rises substantially.

"At over 100,000 miles, you are going to have a high number of expensive claims," says Al Ranieri, president of American Auto Guardian Inc., of suburban Chicago, an independent provider of extended vehicle service contracts. But lifetime engine coverage is popular in certain markets, and that's similar, Ranieri says. The vehicles also are already covered for the first 100,000 miles, he says.

"It's an appealing concept that might get floor traffic," Ranieri says.

Case reduces his financial exposure by making the warranty nontransferable to second owners and requiring original owners to follow and document the factory's recommended maintenance schedule. Many customers will trade their vehicles before driving 200,000 miles, and over time some may forget about the coverage.

"My wife bought a Toyota, and two years later, when we looked inside the glove compartment, we found she had a lifetime tire warranty," says Gary Fagg, a Dallas area insurance consultant. "The first thing the warranty says is that the tires need to be rotated every 5,000 miles. We had 8,000 miles on the car before we realized there was a warranty. We already voided it."

Based on his studies of limited lifetime warranties, Fagg estimates Case pays $100 to $200 per new vehicle sold to provide the longer warranty coverage. "There will be some claims, I assure you," Fagg says. "There are people who keep their cars and they tend to do their scheduled maintenance."

Fagg says people probably wouldn't buy a 20-year/200,000-mile warranty. But if it comes with the new vehicle, as it does at the Case stores, it can "help differentiate the dealership from the competing store across town."